Credit card APR hits record high

Recent Moneyfacts research has revealed that there has been a significant rise in the average APR on credit cards in the period from June to August this year. This is bad news for the many people who currently had debts on their credit cards, making it more expensive now to use this method of borrowing if consumers aren’t already on a 0% interest deal.

The average APR now sits at 24.7% – its highest point since Moneyfacts started to maintain records some 13 years ago. This figure has been steadily rising since September 2017, when it stood at 22.9%. At the same time, the underlying purchase rate (which does not include a card fee) rose to an all-time high of 22.528% – again, a rise of some 1.536% since September 2017.

Source: Moneyfacts Treasury Reports

Rachel Springall, finance expert at Moneyfacts, said: “Consumers who turn to credit cards for their everyday purchases will find that the cost to borrow is starting to rise, as the most lucrative low rate cards have worsened. In fact, over the past quarter, we said goodbye to the lowest rate purchase credit card on the market and have seen rates increase on these lucrative offers.

“Indeed, during Q3 2019 Tesco Bank pulled its Clubcard Credit Card with Low APR Mastercard charging 5.9%, which was the lowest rate card on the market. Over the same quarter, Bank of Scotland, Halifax and Lloyds Bank increased the purchase rate on their credit cards, rising from 6.4% to 9.9% APR. There were other increases too, such as with MBNA’s Low Fee 0% Balance Transfer Mastercard and Long 0% Balance Transfer Mastercard, up from 19.9% to 20.9% APR. In addition, Creation made increases to its IHG Rewards Club credit cards, with its standard card rate increasing from 18.9% to 22.9% APR and its premium card, which includes a £99 annual fee in the APR calculation, up from 41.5% to 45.1% APR (19.9% to 22.9% pa).

“While these changes are unfortunate, consumers may be making more efforts to move their debts to an interest-free alternative, or indeed clear their balances according to recent findings. The latest data from UK Finance shows a decline in the proportion of credit card balances that bear interest, now 53.4% (June 2019) down from 54.6% a year prior. In addition, the annual growth rate of outstanding balances has now fallen to 3.6%, down from its peak of 8.3% at the start of 2018.

“It is worth pointing out that credit card providers will only offer the lowest rates to certain customers, as part of their risk-based pricing. During a period of economic uncertainty, it wouldn’t be unreasonable then to see credit card companies increase the interest rates charged to either existing or new customers if there is a potential for customers to default. However, when customers are notified within 30 days of the provider making any change, there would be plenty of time to switch.

“Credit card customers should take every opportunity to pay more than the minimum repayment, particularly if they have an interest-bearing card. For example, a borrower who makes a purchase of £3,000 on a typical credit card and repays just £100 per month will have the debt linger for over three years and it will cost them £970 in interest*. This alone then should reaffirm the importance to clear debts faster or take advantage of an interest-free deal to give customers more time to spread repayments.”

*Credit card repayment based on £3,000 purchase, based on an interest rate of 18.9% APR, minimum fixed repayment of £100 (thereafter a minimum of 1% plus monthly interest or £5, whichever is higher) and would take three years and four months to pay back, costing £970 in interest over this term.